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Unformatted text preview: CHAPTER 2 An Introduction to Cost Terms and Purposes Overview This chapter introduces the basic terminology of cost accounting. Communication among managers and management accountants is greatly facilitated by having a common understanding of the meaning of cost terms and concepts. The chapter illustrates a major theme of the textbook: using different costs for different purposes. The chapter also provides a framework to help you understand cost accounting and cost management. Review Points 1. Accountants define cost as a resource sacrificed (used) or forgone to achieve a specific objective. For example, it might cost $5,000 per month to rent retail space in a shopping center. To guide their decisions, managers often want to know how much a particular thing costs. This thing is called a cost object , anything for which a measurement of costs is desired. In the following questions, the cost object is in italics: How much does it cost to manufacture a 12- pack of Diet Pepsi ? Which delivery truck is the least expensive to operate? 2. Costing systems account for costs in two basic stages. The first stage is cost accumulation , the collection of cost data in some organized way by means of an accounting system. The second stage is cost assignment , a general term that encompasses both (a) tracing accumulated costs that have a direct relationship to a cost object and (b) allocating accumulated costs that have an indirect relationship to a cost object. 3. A key question in cost assignment is whether costs have a direct or an indirect relationship to the particular cost object. The direct costs of a cost object are related to the particular cost object and can be traced to that cost object in an economically feasible (cost-effective) way. The term cost tracing describes the assignment of direct costs to the particular cost object. The indirect costs of a cost object are related to the particular cost object but cannot be traced to that cost object in an economically feasible way. The term cost allocation describes the assignment of indirect costs to the particular cost object. Several factors affect the classification of a cost as direct or indirect: the materiality (relative importance) of the cost in question, available information-gathering technology, and design of operations. 4. Consider this question: Is a production department managers salary a direct cost or an indirect cost? The answer: It depends on the choice of the cost object . For example, if the cost object is the production department, the salary is a direct cost because it can be traced to the cost object. But if the cost object is one of the many products manufactured in the production department, the salary is an indirect cost because it can be allocated (but cannot be traced) to the cost object....
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